• Midwest industrial vacancy dropped 20 bps QoQ to 4.1% despite 35 bps national rise.

• Net absorption in core metros rose 13% YoY, led by Indianapolis and Columbus.

• Rents climbed 8.2% YoY in secondary distribution markets, outpacing coastal growth.

• Construction starts declined 27% from Q1 2023, tightening future supply outlook.

• Cap rates held steady at 6.0%, resisting the 25 bps expansion seen in Sunbelt peers.

Industrial markets in the U.S. Midwest continue to distinguish themselves against a softening national backdrop, highlighted by resilient absorption and firming rents even as capital costs rise. Institutional allocations, previously focused on coastal “safety plays,” are now recalibrating risk-return models in light of robust tenant demand and restrained new supply. This shift is reshaping the conversation between lenders, investors, and operators, hinting that the cycle’s next outperformers may not match last decade’s ZIP code bias.

While national industrial net absorption decelerated to 49M sq. ft. in Q1 (down 22% YoY), Chicago, Indianapolis, and Columbus posted a combined 18M sq. ft.—a 13% increase from prior year. This regional outperformance tracks with e-commerce reconfiguration and onshoring efforts. “Leases are signing before speculative slabs cure—pace we haven’t seen since 2021,” one Midwest broker remarked, citing fast-tracked 250K–500K sq. ft. lease-ups. Meanwhile, weaker coastal take-up signals shifting supply chain priorities. Markets with demand surges defy historical risk premiums.

Industrial asking rents surged 8.2% YoY in Indianapolis, Columbus, and Louisville, pushing Midwest Class-A averages to $6.55/sq. ft. This contrasts with decelerating rent growth averaging 4.1% on the coasts. By contrast, elevated replacement costs and cost of capital are slowing speculative pipelines—Midwest construction starts dropped 27% YoY. Still, constrained supply is supporting rent negotiations and lease terms favorable to landlords. Short supply pressures will escalate if construction delays persist.

Active construction fell to 19M sq. ft. (from 26M sq. ft. a year ago) as developers face financing rates above 7% and stricter underwriting standards. On balance, developers are rationalizing pipelines—pivoting to build-to-suit and break-even analysis before groundbreak. In practice, this is shifting market leverage toward existing asset owners, especially those with institutional sponsorship and scale. New deliveries will likely undershoot demand in several metro clusters.

Despite a 25 bps cap rate expansion in Sunbelt and coastal hubs, Midwest industrial cap rates remain stable at 6%, reflecting disciplined capital courting differentiated yield. Investors from pension and insurance cohorts are rediscovering the region’s inherent risk simplicity. As a result, deal volume remained steady quarter-over-quarter ($1.6B in Q1 vs $1.65B prior), with several cross-state multi-asset trades signaling institutional conviction. Midwest pricing volatility appears muted relative to gateway coastal peers.

Nonetheless, market participants acknowledge ongoing financing difficulty: loan proceeds are averaging 58–62% LTC, with debt yields up 70–90 bps YoY. In turn, smaller sponsors and leveraged buyers remain sidelined, while flight-to-quality intensifies competition for stabilized, income-producing assets. Land values are holding, but appetite for transitional product is thin. Underwriting remains stringent.

Should short-term interest rates stabilize or decline, Midwest industrial fundamentals are poised for additional outperformance: low vacancy, cyclical supply discipline, and premium rent growth support resilience. However, persistently high capital costs and delayed entitlements could crimp speculative development through 2025. Institutional capital is likely to prioritize core-plus strategies, asset aggregation, and select build-to-suit where tail risk remains contained. Owners positioned with fixed-rate debt and stable tenants are entering a phase of relative pricing power; transaction visibility, though, will hinge on the credit cycle’s next phase.